A New Year: More of the Same in the Global Economy

Welcome to 2015! Or so the calendar tells us. The Gregorian Calendar that is — introduced in 1582 to adjust for the variable timing of Easter (the spring equinox).

Not all nations moved with the times at equal speed. Greece was the last European country to adopt the new calendar. It didn’t make the move until 1923! The Soviet Union didn’t change from the Julian calendar format until 1929.

Is it any coincidence that these two laggards are in trouble as we head into 2015? I don’t know. Probably. But I would make the point that survival depends on adaptability and the willingness to change. Forget death and taxes. In the world of nature (which we are all a part of) change is the only constant in life.

Resistance to change spells trouble for nations and, it will spell trouble for you too as an investor if you don’t embrace it. So in this brief window of New Year’s resolutions, think about the benefits of change in your life.

So what’s in store for this year?

Let me preface that with a disclaimer. I have no idea. In fact, I’d go as far as saying that this time of year is completely useless for investors as far as getting good investment ideas go. The media is awash with all kinds of gibberish, ranging from the best stocks to buy, top 10 themes, outlandish predictions, and whatever else fills column inches in the holiday season.

We may draw the line at the end of one year and the start of another, but markets just keep rolling on, oblivious to the boundaries we impose.

So in that spirit, my best guess is that we’ll get more of the same…until some major event occurs to change the collective thinking of the herd. For a while now, the thinking has been that global central banks are the only game in town.

Two headlines in today’s afr.com sum it up. One says ‘global economy on shaky ground’, while the other reads ‘global equities seen extending rally’ — thanks to central bank support, of course.

Deflationary forces in the real economy means inflation for major assets markets as central banks make a futile attempt at creating inflation. They will end up causing an economic calamity.

In the meantime, get ready for more of the same. At the top of the list is the US dollar. Get set for the bull market to continue. Sure, you’ll see corrections along the way, but the trend looks like a strong one.

In global markets, there are three main currencies, the US dollar, the euro and the yen. Nothing else really matters.

Politicians and the Bank of Japan are intent on destroying the yen, however long it takes, while the euro has structural problems that seem insurmountable.
This leaves the US dollar as the only game in town. With QE ended (for now) and the market looking at US rate rises midway through the year, this secular trend looks set to continue.

And that’s bad news for commodities. Gold crashed in 2013. Oil crashed in 2014 (it fell 50% in US dollar terms in the last six months of the year). The widely used CRB commodities index is at its lowest point since 2009. It’s plunged around 15% from late November alone.

The index is now extremely oversold, which means a short term bounce is likely. But the trend is down. And if the US dollar bull market continues this year, that’s not going to change. Expect more pain for commodities.

That doesn’t mean you should abandon the sector altogether, though. The falling Aussie dollar, combined with an even faster fall in energy prices (a major cost for miners) means some Aussie miners might even experience expanding margins (in Aussie dollar terms).

But you’ll have to choose your sectors carefully. As we kick off the year, there are no real standouts. Gold stocks look cheap but they have done so for a while. Now, energy stocks look like decent value too but not if prices remain low for a long time.

And that’s the risk, isn’t it? When will this commodity bear end? Not yet, is my guess. So what might be the next shoe to drop in the commodities space? Copper might be a candidate.

It’s been grinding lower for the last three years, but you haven’t seen a rout like we’ve had in oil and gold and silver. Not yet anyway. As you can see in the chart below, it’s been breaking below support levels for a few years. It did so again in December. Will we get a price plunge in 2015?

The next area of concern for 2015 is the Eurozone. Those Gregorian calendar laggers, the Greeks, are causing trouble again. There’s an election set for 25 January, where the popular Syriza party, if it wins power, will reject the austerity policies imposed on Greece by the EU and IMF.

That would threaten payments to creditors and risk Greece getting thrown out of the euro. There is a view in Europe that a Grexit now wouldn’t bring down the whole currency bloc. But even so there will be a decent amount of volatility and uncertainty caused by a Syriza election win.

And then there’s rising discontent in Italy too.

In short, after a few years of relative calm, the Eurozone will be a hotspot again in 2015.

What about Australia? With China now in a structural slowdown, Australia’s terms of trade will continue to deflate, meaning our national income growth will remain weak.

That means there will be the usual calls for interest rate cuts to ‘stimulate’ the economy. And RBA boss Glenn Stevens will push back in an attempt to pressure the government into making some decent adjustments to fiscal policy. It will be a futile attempt though…this government is as inept as any that we’ve had in the past.

Australia needs tough decisions in 2015; instead we’ll get more talk. The tax white paper isn’t due until late in the year…and nothing will be done anyway until after the next election in 2016.

So this year will be another one of hoping Australia’s ponzi economy, built on debt, property prices and consumption, will hold up again until something else comes along.

But maybe that’s just wishful thinking. Maybe 2015 will be the year that Australia’s luck finally runs out.

Greg Canavan is the Managing Editor of The Daily Reckoning and is the foremost authority for retail investors on value investing in Australia. He is a former head of Australasian Research for an Australian asset-management group and has been a regular guest on CNBC, Sky Business’s The Perrett Report and Lateline Business. Greg is also the editor of Crisis & Opportunity, an investment publication designed to help investors profit from companies and stocks that are undervalued on the market.
To follow Greg's financial world view more closely you can subscribe to The Daily Reckoning for free here. If you’re already a Daily Reckoning subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Daily Reckoning emails. For more on Greg go here.

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